How Robust are FEERs?

Paper number: 96/06

Paper date: January 1996

Year: 1996

Paper Category: Discussion Paper

Authors

Rebecca Driver
University of Exeter

Simon Wren-Lewis
University of Exeter

Abstract

Fundamental Equilibrium Exchange Rates, or FEERs, are defined as the real exchange rate which would prevail if the economy were to be in internal and external equilibrium. As such they have been widely used both for policy purposes and as a method of calculating the level to which the real exchange rate might tend in the medium run. This paper addresses the issue of the sensitivity of FEERs to changes in the assumptions underlying these calculations. We quantify the sensitivity of the FEER calculations to various parameters and inputs, and show that in many cases the changes induced in the FEER are large.

JEL Classification Nos: F00
Keywords: Fundamental Equilibrium Exchange Rates

Corresponding Author: Rebecca Driver, Department of Economics, University of Exeter, Amory Building, Rennes Drive, Exeter EX4 4RJ,Great Britain, tel:(44) 1392 263155, fax: (44) 1392 263242, email: rldriver@exeter. ac.uk

 


This research was made possible by Grant No F124L from the Leverhulme Trust. Wren-Lewis is a fellow of the Centre for Economic Policy Research. Much of this work is based on earlier research undertaken with Ray Barrell, but responsibility for any errors is ours alone.